Published 6:00 pm, Saturday, January 1, 2011

By Matthew L. Wald

New York Times News Service

WASHINGTON -- Diesel and jet fuel are usually made from crude oil. But with oil prices rising even as a glut of natural gas keeps prices for that fuel extraordinarily cheap, a bit of expensive alchemy is suddenly starting to look financially appealing: turning natural gas into liquid fuels.

A South African firm, Sasol, announced Monday it would spend just over 1 billion Canadian dollars to buy a half-interest in a Canadian shale gas field, so it can explore turning natural gas into diesel and other liquids. Sasol's proprietary conversion technology was developed decades ago to help the apartheid government of South Africa survive an international oil embargo, and it is a refinement of the ones used by the Germans to make fuel for the Wehrmacht during World War II.

The technology takes "a lot of money and a lot of effort," said Michael E. Webber, associate director of the Center for International Energy Environmental Policy at the University of Texas, Austin. "You wouldn't do this if you could find easy oil," he said.

But with the huge spread between oil and gas prices, and predictions of oil topping $100 a barrel soon, the conversion technology could be a "a money-maker for whoever is a first mover in that space."

Several other companies have intermittently tried to make liquid fuels from natural gas or coal. For example, the energy company Baard has been planning a coal-to-liquids plant in Ohio but has not been able to pull the pieces together, and Peabody Coal has discussed a similar plant.

Sasol figures that the natural gas needed for a gallon of diesel, plus operating costs, comes to about $1.50 a gallon. In comparison, a gallon of diesel made from crude oil now costs more than $2, even before refining, and many forecasts are for the price of oil to go higher.

But there is a hefty cost of building the chemical plant to do the conversion, which might run over $1.5 billion for a new Canadian plant that would handle 40,000 barrels a day.

The calculations also exclude another cost: greenhouse gas emissions, which may be higher for a conversion plant than a typical refinery, depending on how the work is done.

"Everything ugly is in vogue again," said Josh Mogerman, an energy specialist at the Natural Resources Defense Council, which has been fighting a proposed coal-to-liquids plant in Ohio.

From a financial perspective, the technology is far from ugly. A barrel of oil has historically cost one to two times as much as the equivalent amount of energy from natural gas. But right now, vast supplies of natural gas from shale formations in North America have driven prices down, so oil is triple the price of the gas equivalent.

The new ratio creates "a very attractive economic option," said Lean Strauss, senior group executive at Sasol.

While the operating costs favor conversion, the cost to build the chemical plant is another matter; gas-to-liquids plants are far more capital-intensive than traditional refineries that make the same products from crude oil.

A plant opened by Sasol in Qatar in 2006, in partnership with the national oil company, Qatar Petroleum, cost $37,000 per barrel of daily capacity, but costs in Canada would be higher, Strauss said. Sasol produces 160,000 barrels a day of its liquids -- diesel, naphtha and propane -- in South Africa. It also turns out jet fuel, which is routinely blended into fuel for airliners departing from Johannesburg. In August, Sasol supplied 100 percent of the fuel for a Boeing 737 flight from Johannesburg to Cape Town.

In the deal announced Monday, Sasol acquired a 50-percent stake in Farrell Creek shale gas assets, in British Columbia. With the other owner, Talisman Energy, it will begin a feasibility study early next year on building a gas-to-liquids plant, and Talisman will have the option to own 50 percent of that.